Say what you will about social equality issues, corporate governance and all that. Forget the golden parachutes, the corner offices and the outrageous salaries and bonuses.

The fact is, this dismal economy still has deep problems. Factory output is dropping for the first time since the recession ended -- and the unemployment rate is rising.

To fix the economy, we must stop demonizing the CEOs and big business. Instead, we need to coddle them and soothe their troubled minds. Above all, we need to get them to spend and invest again.

No, I haven't had a sip of the hard right's Kool-Aid. It's a Faustian deal: growth now and reform later.

Even if doesn't sit well in the our collective conscience, our political leaders need to address the crisis of confidence in the corporate sector: worries over the "fiscal cliff" of tax hikes and spending cuts worth 5% of the economy due to hit in 2013; worries over tighter regulatory burdens; and worries over the eurozone crisis, energy policy and the potential for new stimulus from global central banks.

Our leaders have little choice, because the corporate sector is sitting on a pile of cash and is unencumbered by debt. And it's the only segment of the economy in that position. CEOs have underinvested and accumulated idle cash over the past 10 years. You can see this in the way the country's productive capacity has flat-lined while inventories dwindle to three-year lows and hiring slows.

Image: Anthony Mirhaydari

Anthony Mirhaydari

To put it another way, since the pre-recession peak, America's industrial base has started to rust away, because CEOs haven't felt comfortable paying for even basic maintenance on capital equipment. That's a serious sign something's wrong.

As a result, the economy's speed limit -- its potential growth rate -- has slowed to as low as 1.5% according to Deutsche Bank estimates. That's not enough to push down the unemployment rate or generate the wealth needed to pay down household and government debt loads. It also limits gains in labor productivity, which keeps our standard of living stagnant.

It's like this: Whatever you think of top executives or their fears, we need happy, confident CEOs or there will be no real recovery.

The uncertainty problem

The crux of the problem is that the CEOs are scared. Uncertainty, as measured by a group of economists from Stanford and the University of Chicago, has remained unusually high and volatile since the banking panic and the start of the Great Recession in 2007. Historically, according to their research, stock market returns, business investment and inventory accumulation are all affected by high levels of uncertainty.

What goes into their measure of uncertainty? Things like news flow, the number of tax code provisions due to expire and disagreement among economic forecasters.

The curious thing is that consumers and the government have done most of what they can to support the economy over the past few years, given constrained finances and the falling popularity of debt-financed stimulus. And it has worked, at least up to a point. The economy is growing, albeit slowly; jobs (though too few of them) are being created every month.

Just look at this week's retail sales report, which surprised to the upside, thanks to a surge in auto sales. And that has fueled a marginal rebound in production to satisfy this short-term need.

But businesses, worried about uncertainty, haven't embarked on the kind of long-term projects that would kick this economy into high gear and create a wave of hiring, as occured when corporate investment surged in the 1980s and 1990s. You can see this in the chart below, which shows how America's industrial capacity -- machinery, assembly lines, generators and the like -- hasn't really grown since the Clinton administration.

Image: Industrial capacity indices © MSN Money

Morgan Stanley estimates that political uncertainty alone will shave half a percentage point off of growth in the gross domestic product later this year -- at a time when growth is running at a pitiful 1.5% annual rate. And over the last few weeks, executives from Honeywell International (HON), United Parcel Service (UPS), Caterpillar (CAT) and JPMorgan Chase (JPM) have all cited political uncertainty as a threat to earnings, investment and hiring.

The Conference Board's measure of CEO confidence plunged in the second quarter, down to 47 from 63 in the first quarter. A reading lower than 50 indicates more negative than positive responses. Only 17% of respondents said conditions had improved in the past six months, a huge drop from 67% in the first quarter. Looking ahead, only 20% expect conditions to improve over the next six months, down from 59% in the first quarter.

But perhaps the night is darkest just before dawn.

Credit Suisse economists note that the ratio of industrial production to demand has fallen to its lowest level in nearly three years -- a level that in the past has come just before some big cyclical recoveries in output and risk appetite. Turnaround points include 1983, 1987, 1994, 1999 and 2003.

Is a repeat performance coming?

Encouraging growth

The CEOs certainly have the wherewithal to do more. Balance sheets are very healthy, especially compared with those of governments and households. In the four largest economies, government debt-to-GDP is moving past 110%, while corporate debt is below 80%. The U.S. government is running a budget deficit of around 8% of GDP, while the corporate sector is running a financial surplus of 2.4% of GDP -- $374 billion annually -- above prior peaks seen in the early 1990s and early 2000s.

Investors are throwing cash into every corner office willing to take it, given the rush into corporate bonds that's currently under way.

Last month, companies sold $75 billion in corporate bonds, the busiest July on record. For 2012 overall, corporate debt issuance is on track to hit $1 trillion, according to Thomson Reuters. It's no wonder: Those bonds carry an average yield of around 3.2%, and safe-haven investors are seeking alternatives to the negative real yields on Treasury bonds. Over the past 30 years, corporate bond yields have averaged 7.2%, as the chart below shows -- but 3.2% is good in today's markets.

Image: Moody's Corporate AAA Bond yield © MSN Money

Getting them in the game

So CEOs have the need and the to spend and invest, but the motivation is missing. That's where government, encouraged by the voters, can help.

Thanks to years of stagnant wages, higher fuel costs and favorable demographics compared with China, as well as rising wages and inflationary pressures overseas, America is enjoying a resurgence in manufacturing competitiveness. A study by the Boston Consulting Group (.pdf file) earlier this year found that seven industries are "nearing the point at which rising costs in China could prompt companies to shift the manufacture of many goods consumed in the U.S. back to the U.S."

This shift could create, according to the BCG team, 2 million to 3 million jobs and add $100 billion to the U.S. economy. Areas include furniture, computers, electronics, appliances, machinery and fabricated metals. Just look at Google's (GOOG) decision to make its new Nexus Q media device near its headquarters in California.

But in order to encourage CEOs to make this happen -- to invest in and start building things like fans, vacuum cleaners, microwaves, freezers and dishwashers here at home -- government needs to help tip the cost balance in our favor and away from China and other export-oriented Asian economies. And it needs to do it now.

We need to focus on the strategies used throughout the South to attract foreign auto manufacturers, including tax incentives; community college training programs; highway, rail and utility connections; and site preparations. We need to simplify and lower the corporate tax rate. We need to streamline employment processes. And above all, we need to resolve potential watershed events like the fiscal cliff.

This may sound like more corporate handouts, and you may not like the idea of giving additional incentives to wealthy CEOs. I sure don't.

But we've made a choice as a society to have a dynamic, open-market economy with porous borders through which goods and capital can flow to our trading partners -- other countries. Given that context, this is what must be done. Our governments -- national, state and local -- must compete for jobs, just as states compete now.

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Otherwise, the CEOs will take their money, their factories and their jobs somewhere else -- Mexico, for example. That's where the BCG team believes some of the jobs coming back from China could end up if we're not careful.

At the time of publication, Anthony Mirhaydari did not own or control shares of any company mentioned in this column.

Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.